Prudent Investor Standards
Modern prudent investor standards are based on an older rule known as the prudent man rule. Under this rule, professionals acted as fiduciaries (trusted advisers) and were expected to show the same level of care for others’ portfolios as they, or any other prudent person, would for their own. In other words, they should not subject their clients’ portfolios to any more risk than the average, cautious investor would take.
Over the years, the relatively simple requirement for professionals to compare themselves to a prudent person has been spelled out and expanded into what is now called the Prudent Investor Rule (note the change from man to investor). In addition, the Prudent Investor Rule recognizes that the most cautious investment may not always be the most prudent investment, because prudent includes making money and beating inflation as well as preserving capital. Most state laws require fiduciaries to follow the principles included in this rule.
The Prudent Investor Rule is based on modern portfolio theory and outlines the following principles, which must be upheld when managing assets for a fiduciary account:
- • The fiduciary should view risk and return in the context of the whole portfolio and in the context of the account owner’s broader portfolio goals. For ex